The following are excerpt on Sears Holdings Corp. from the transcript Fairholme Funds November 25, 2008 Conference Call.
Shareholder: Next question, concentrated positions with high short interests, how shorts effect your thinking and how you manage the risk opportunity?
Bruce Berkowitz: One in general, I would be OK, if one of my children married someone who shorts for a living. I don't have a problem with shorts. I don’t short. I don’t like short. I’m not engineered for shorting. The fund doesn’t short. That’s it. In terms of our position with a high short interest, there’s Sears which represents today about 6% of the portfolio. And has about, I believe, 16% short-interest. Why people are shorting Sears at this price, I don't have the slightest idea when I look at the assets. And I can’t see how shorting Sears at this price can be a benefit. Well, then again, I couldn’t see that at $100 per share. But time will tell. At this price, and with the few remaining shares out standing, Eddie Lampert just has to keep buying stock back and the game is over.
Another position we have – and I like the guy. And I think, yes, he bought too soon but I think his strategy is right. And I believe this strategy isn’t much different than Warren Buffett’s strategy during the Berkshire textile mile initial episode. Time will tell whether or not we’re right. But I’m excited about Sears.
Shareholder: the fund started buying Sears before the recession started with a very severe recession effecting the U.S. economy. How will Sears be able to increase shareholder value in the next couple of years?
Bruce Berkowitz: Well, I think I’ve answered that one. All Eddie Lampert has to do is to continue to buy shares back. There are many different ways, in my opinion, in which you can get to the current market price.
Shareholder: The next question, it seems that Bruce and Eddie Lampert are the only two investors that believe that Sears is a good company. How can everybody else be wrong?
Bruce Berkowitz: Well, I once read a book about Winston Churchill and he seemed to be the only person in an entire country that understood what was going on in Nazi Germany. How can an entire country get it wrong and one person be right? For that matter, how can get an entire country of smart, decent, fun-loving people at a time allow such atrocities to happen? A herd mentality is intense. The psychology is perverse. Whether or not there are only two people something does note mean that that is wrong or right. But the final results will prove whether or those two people are right or wrong.
Shareholder: And it’s something you touched upon which I’ve been thinking about, as well, which with Eddie have such a large position in Sears that he could easily take it private himself. Do you think – are you concerned that it will get cheap enough that he will be able to take it private to a point to where your entry point or what you hope to gain from when the company comes to fruition will be greatly curtailed?
Bruce Berkowitz: It’s possible. I don’t think it’s probable. I haven’t not yet met the man on purpose. I’ve not talked with him. I don’t want to talk to him. I am waiting for the earnings of the company. After the earnings and information disseminate, I would like to talk to with him. I haven’t set a date yet. But from my reading of the man and what he’s had so say and who his heroes are I believe he’s not going to steal the company from the remaining shareholders. And I could easily see him you know retrenching to Sears. Bu I don’t know because I haven’t talked with him. I don’t need to know because it’s cheap enough. It – but I do not believe – I think the man is of a level of integrity and honesty that he won’t do that. But clearly, he is testing the faithful. And I don’t believe I’m being delusional on this issue.
Shareholder: Your thesis on Sears Holdings how much of it is based on assets, how much on them as a retailer, and how much on Eddie Lampert as a capital allocator? I mean would you be …
Bruce Berkowitz: It’s mostly – it’s based on assets and liabilities, with the assumption that he’s a good capital – that he will be a great capital allocator. But to make money right now all of you have to do is liquidate the company, that’s it. There’s no – it’s no more difficult than that given the assets and liabilities. But I believe the man is trying to save the jobs of a lot of people. Sears and Kmart have a large number of employees. And I really truly believe he’s giving it his best shot to resuscitate the retailer.
Frankly, the United States is over-retailed, it’s over-stored. The whole world is over-retailed and over-stored. So we went into this based upon a liquidation analysis. And thought that if he ever was able to turnaround Kmart and Sears, it would be a grand slam home run in baseball terminology but we weren’t expecting it. Nor were we depending on it. Excuse me?
Shareholder: I’m sorry, this liquidation scenario, do you think this has changed based on the tremendous drop in commercial real estate all across the world?
Bruce Berkowitz: Sure, absolutely it’s changed. It’s gone down. I don’t think it’s gone down as much as most people think. And I think one day it goes up. But it has gone
down. How much? I don't know. This summer, we spent a tremendous amount of time going to all of the tax collectors offices around the United States trying to get the tax value of Sears and Kmart properties, a lot of people, a lot of time. We came up with numbers that ranged between sort of 80 and $90 per share. So how much has it changed from the summer? And where is the stock today? And how much is the largest appliance servicer worth? Or a large automotive center worth? Or three or four brands of Sears Canada and $10 billion of inventories. And I’m just – it doesn’t take a lot to add up these days.
You know did we show great brilliance at the average price at which bought Sears? No. Did we believe we were buying below liquidation? Yes. I think every price Eddie Lampert he thought was below liquidation. But we shall see.
The following are excerpt on Sears Holdings Corp. from the transcript of Fairholm Funds February 11, 2009 Conference Call.
Shareholder: what are the top successes of Eddie Lampert’s track record as a capital allocator? (Our key) is rather wide. How do you get comfortable with his ability for much of what he does and his hedge fund is not public?
Bruce Berkowitz: Well, we – Eddie Lampert’s overall record is still quite deep and I don’t know you know that paper trail is important, but what’s most important to us is studying, see his balance sheet, its liquidation value. I have a whole bunch of more question on Sears that are coming a little – that – (of to an) answer and we go into a bit more detail. But we’ve always shares based upon its liquidation values and always thought that we were buying below liquidation values and we shall see. I still believe that Sears is quite reminiscent of Berkshire Hathaway’s days with the – with Warren Buffet’s days, I should say, with the Berkshire Textile Mills and that inflection point, that point when we decided it was time to move on and reallocate the cash to more productive uses. There’s nothing I see at this point which tells me that will not happen at Sears.
Shareholder: could you explain how you have tried to kill Sears and could not? For example, how long can Sears whether the poor economic conditions, which may persist for the next two, three more years? When for the next few years – how can they pay their annual interest payments of 300 million a year, plus meanwhile annual revenues of 50 billion in operating income off 0.5 billion?
Bruce Berkowitz: Well $50 billion, even of declining revenues, is quite a significant amount of revenues and so is an operating income of 1.5 billion with only 120 million shares. Also, when you take a look at the company’s balance sheet, and we really have truly assessed Sears based upon its balance sheet, you’ll see over $10 billion of inventories, payables, four-and-a-half billion – I mean just the inventories alone equal the price of the stock. If you want, cut it in half. We haven’t even gotten to real estate, Kenmore, Craftsman, DieHard, Landon, the brands, cash on the balance sheet. Has our evaluations of liquidation value declined in this environment? The answer is yes. Is it still dramatically above where Sears is trading today? The answer is yes.
Shareholders: Can Sears pay off their debt? Can they refinance at reasonable terms?
Bruce Berkowitz: I think – I think the answer to both questions is yes and if Eddie Lampert has any difficulties I think he should call Fairholme cause we would be willing to help him at the right price.
Shareholder: If Sears retires a debt, but stops or curtails stock buybacks, what happens to the stock price when Sears can’t fend off the short-sellers?
Bruce Berkowitz: Well, probably if the short-sellers are still there it goes down. And I think – I hope the stock does go down because it will be to our long-term benefit. I mean after all, when you take a look at the $500 million chunk of cash he’s using to buy back stock, that half-a-billion dollars goes an awfully long way at $40 per share.
Shareholder: How will you know when Eddie Lampert reaches the point where you have to sell the underlying real estate at distressed prices in order to prop up the retail side of Sears? Wouldn’t it be wise to meet with Lampert to get a sense of whether he actually has a turnaround or asset sale plan?
Bruce Berkowitz: I guess we’ll know when he sells, but even when he starts to sell, we always say that they’re going to have to be careful. I mean the real estate probably very much matches up with some type of – and in our opinion is correct – some type of 80/20 rule, where you have 20 percent of the real estate is very, very valuable, even today, and 80 percent may not be as valuable as some might think.
In terms of meeting Eddie Lampert, it’s probably a good time, but it – just like Buffet though, I think if you – if you – if you read his letters, if you go through the queues and the news releases, I think he pretty much tells you the plan. And the plan does match up in my mind, again, with how Warren Buffet behaved with the Berkshire Textile Mills.
Shareholder: Next question, concentrated positions with high short interests, how shorts effect your thinking and how you manage the risk opportunity?
Bruce Berkowitz: One in general, I would be OK, if one of my children married someone who shorts for a living. I don't have a problem with shorts. I don’t short. I don’t like short. I’m not engineered for shorting. The fund doesn’t short. That’s it. In terms of our position with a high short interest, there’s Sears which represents today about 6% of the portfolio. And has about, I believe, 16% short-interest. Why people are shorting Sears at this price, I don't have the slightest idea when I look at the assets. And I can’t see how shorting Sears at this price can be a benefit. Well, then again, I couldn’t see that at $100 per share. But time will tell. At this price, and with the few remaining shares out standing, Eddie Lampert just has to keep buying stock back and the game is over.
Another position we have – and I like the guy. And I think, yes, he bought too soon but I think his strategy is right. And I believe this strategy isn’t much different than Warren Buffett’s strategy during the Berkshire textile mile initial episode. Time will tell whether or not we’re right. But I’m excited about Sears.
Shareholder: the fund started buying Sears before the recession started with a very severe recession effecting the U.S. economy. How will Sears be able to increase shareholder value in the next couple of years?
Bruce Berkowitz: Well, I think I’ve answered that one. All Eddie Lampert has to do is to continue to buy shares back. There are many different ways, in my opinion, in which you can get to the current market price.
Shareholder: The next question, it seems that Bruce and Eddie Lampert are the only two investors that believe that Sears is a good company. How can everybody else be wrong?
Bruce Berkowitz: Well, I once read a book about Winston Churchill and he seemed to be the only person in an entire country that understood what was going on in Nazi Germany. How can an entire country get it wrong and one person be right? For that matter, how can get an entire country of smart, decent, fun-loving people at a time allow such atrocities to happen? A herd mentality is intense. The psychology is perverse. Whether or not there are only two people something does note mean that that is wrong or right. But the final results will prove whether or those two people are right or wrong.
Shareholder: And it’s something you touched upon which I’ve been thinking about, as well, which with Eddie have such a large position in Sears that he could easily take it private himself. Do you think – are you concerned that it will get cheap enough that he will be able to take it private to a point to where your entry point or what you hope to gain from when the company comes to fruition will be greatly curtailed?
Bruce Berkowitz: It’s possible. I don’t think it’s probable. I haven’t not yet met the man on purpose. I’ve not talked with him. I don’t want to talk to him. I am waiting for the earnings of the company. After the earnings and information disseminate, I would like to talk to with him. I haven’t set a date yet. But from my reading of the man and what he’s had so say and who his heroes are I believe he’s not going to steal the company from the remaining shareholders. And I could easily see him you know retrenching to Sears. Bu I don’t know because I haven’t talked with him. I don’t need to know because it’s cheap enough. It – but I do not believe – I think the man is of a level of integrity and honesty that he won’t do that. But clearly, he is testing the faithful. And I don’t believe I’m being delusional on this issue.
Shareholder: Your thesis on Sears Holdings how much of it is based on assets, how much on them as a retailer, and how much on Eddie Lampert as a capital allocator? I mean would you be …
Bruce Berkowitz: It’s mostly – it’s based on assets and liabilities, with the assumption that he’s a good capital – that he will be a great capital allocator. But to make money right now all of you have to do is liquidate the company, that’s it. There’s no – it’s no more difficult than that given the assets and liabilities. But I believe the man is trying to save the jobs of a lot of people. Sears and Kmart have a large number of employees. And I really truly believe he’s giving it his best shot to resuscitate the retailer.
Frankly, the United States is over-retailed, it’s over-stored. The whole world is over-retailed and over-stored. So we went into this based upon a liquidation analysis. And thought that if he ever was able to turnaround Kmart and Sears, it would be a grand slam home run in baseball terminology but we weren’t expecting it. Nor were we depending on it. Excuse me?
Shareholder: I’m sorry, this liquidation scenario, do you think this has changed based on the tremendous drop in commercial real estate all across the world?
Bruce Berkowitz: Sure, absolutely it’s changed. It’s gone down. I don’t think it’s gone down as much as most people think. And I think one day it goes up. But it has gone
down. How much? I don't know. This summer, we spent a tremendous amount of time going to all of the tax collectors offices around the United States trying to get the tax value of Sears and Kmart properties, a lot of people, a lot of time. We came up with numbers that ranged between sort of 80 and $90 per share. So how much has it changed from the summer? And where is the stock today? And how much is the largest appliance servicer worth? Or a large automotive center worth? Or three or four brands of Sears Canada and $10 billion of inventories. And I’m just – it doesn’t take a lot to add up these days.
You know did we show great brilliance at the average price at which bought Sears? No. Did we believe we were buying below liquidation? Yes. I think every price Eddie Lampert he thought was below liquidation. But we shall see.
The following are excerpt on Sears Holdings Corp. from the transcript of Fairholm Funds February 11, 2009 Conference Call.
Shareholder: what are the top successes of Eddie Lampert’s track record as a capital allocator? (Our key) is rather wide. How do you get comfortable with his ability for much of what he does and his hedge fund is not public?
Bruce Berkowitz: Well, we – Eddie Lampert’s overall record is still quite deep and I don’t know you know that paper trail is important, but what’s most important to us is studying, see his balance sheet, its liquidation value. I have a whole bunch of more question on Sears that are coming a little – that – (of to an) answer and we go into a bit more detail. But we’ve always shares based upon its liquidation values and always thought that we were buying below liquidation values and we shall see. I still believe that Sears is quite reminiscent of Berkshire Hathaway’s days with the – with Warren Buffet’s days, I should say, with the Berkshire Textile Mills and that inflection point, that point when we decided it was time to move on and reallocate the cash to more productive uses. There’s nothing I see at this point which tells me that will not happen at Sears.
Shareholder: could you explain how you have tried to kill Sears and could not? For example, how long can Sears whether the poor economic conditions, which may persist for the next two, three more years? When for the next few years – how can they pay their annual interest payments of 300 million a year, plus meanwhile annual revenues of 50 billion in operating income off 0.5 billion?
Bruce Berkowitz: Well $50 billion, even of declining revenues, is quite a significant amount of revenues and so is an operating income of 1.5 billion with only 120 million shares. Also, when you take a look at the company’s balance sheet, and we really have truly assessed Sears based upon its balance sheet, you’ll see over $10 billion of inventories, payables, four-and-a-half billion – I mean just the inventories alone equal the price of the stock. If you want, cut it in half. We haven’t even gotten to real estate, Kenmore, Craftsman, DieHard, Landon, the brands, cash on the balance sheet. Has our evaluations of liquidation value declined in this environment? The answer is yes. Is it still dramatically above where Sears is trading today? The answer is yes.
Shareholders: Can Sears pay off their debt? Can they refinance at reasonable terms?
Bruce Berkowitz: I think – I think the answer to both questions is yes and if Eddie Lampert has any difficulties I think he should call Fairholme cause we would be willing to help him at the right price.
Shareholder: If Sears retires a debt, but stops or curtails stock buybacks, what happens to the stock price when Sears can’t fend off the short-sellers?
Bruce Berkowitz: Well, probably if the short-sellers are still there it goes down. And I think – I hope the stock does go down because it will be to our long-term benefit. I mean after all, when you take a look at the $500 million chunk of cash he’s using to buy back stock, that half-a-billion dollars goes an awfully long way at $40 per share.
Shareholder: How will you know when Eddie Lampert reaches the point where you have to sell the underlying real estate at distressed prices in order to prop up the retail side of Sears? Wouldn’t it be wise to meet with Lampert to get a sense of whether he actually has a turnaround or asset sale plan?
Bruce Berkowitz: I guess we’ll know when he sells, but even when he starts to sell, we always say that they’re going to have to be careful. I mean the real estate probably very much matches up with some type of – and in our opinion is correct – some type of 80/20 rule, where you have 20 percent of the real estate is very, very valuable, even today, and 80 percent may not be as valuable as some might think.
In terms of meeting Eddie Lampert, it’s probably a good time, but it – just like Buffet though, I think if you – if you – if you read his letters, if you go through the queues and the news releases, I think he pretty much tells you the plan. And the plan does match up in my mind, again, with how Warren Buffet behaved with the Berkshire Textile Mills.
